Market Rewarding Positive EPS Surprises Less Than Average for S&P 500 Companies for Q4

To date, 84% of the companies in the S&P 500 have reported earnings for the fourth quarter. Of these companies, 77% have reported actual EPS above the mean EPS estimate, which is slightly above the five-year average of 76%. In aggregate, earnings have exceeded estimates by 8.5%, which is slightly below the five-year average of 8.6%.

Given this average performance relative to analyst expectations, how has the market responded to positive EPS surprises and negative EPS surprises reported by S&P 500 companies during the Q4 earnings season? To date, the market is rewarding positive earnings surprises less than average and punishing negative earnings surprises more than average.

Smaller Price Increases for Positive Earnings Surprises

Companies that have reported positive earnings surprises for Q4 2021 have seen an average price increase of 0.2% two days before the earnings release through two days after the earnings release. This percentage increase is smaller than the five-year average price increase of 0.8% during this same window for companies reporting positive earnings surprises. In fact, this is the smallest average price increase for S&P 500 companies reporting positive EPS surprises since Q4 2020 (+0.04%).

One example of a company that reported a positive EPS surprise in Q4 but witnessed a negative stock price reaction is Netflix. On January 20, the company reported actual EPS of $1.33 for Q4, which was well above the mean EPS estimate of $0.83. However, from January 18 to January 24, the stock price for Netflix decreased by 24.2% (to $387.15 from $510.80).

Larger Price Decreases for Negative Earnings Surprises

Companies that have reported negative earnings surprises for Q4 2021 have seen an average price decrease of 2.8% two days before the earnings release through two days after the earnings. This percentage decrease is larger than the five-year average price decrease of 2.3% during this same window for companies reporting negative earnings surprises.

One example of a company that reported a negative EPS surprise in Q4 and saw a substantial negative stock price reaction is Meta Platforms. On February 2, the company reported actual EPS of $3.67 for Q4, which was below the mean EPS estimate of $3.84. From January 31 to February 4, the stock price for Meta Platforms decreased by 24.3% (to $237.09 from $313.26).

Why is the market rewarding positive EPS surprises less than average and punishing negative EPS surprises more than average?

Possible Explanations

While the earnings performance of S&P 500 companies relative to estimates for Q4 is in line with recent averages, it is weaker than the performance in recent quarters. From Q2 2020 through Q3 2021, 84% of S&P 500 companies reported a positive EPS surprise on average. In aggregate, actual earnings reported by S&P 500 companies over these six quarters exceeded estimated earnings by 17.5% on average. During these six quarters, companies that reported a positive EPS surprise saw an average price increase of 1.0% over the four-day window, while companies that reported a negative EPS surprise saw an average price decrease of 1.4% over the four-day window. Thus, given the above-average earnings numbers of the last six quarters, it appears the market is rewarding average positive EPS surprise numbers less than average and punishing average negative EPS surprise numbers more than average.

Companies and analysts have been more negative in their outlooks and estimate revisions for Q1 2022 relative to recent quarters.

In addition, companies and analysts have been more negative in their outlooks and estimate revisions for Q1 2022 relative to recent quarters. In terms of earnings guidance from corporations, 71% of the S&P 500 companies (55 out of 77) that have issued EPS guidance for Q1 2022 have issued negative guidance. This is the highest percentage of S&P 500 companies issuing negative guidance since Q3 2019 (73%). In terms of revisions to EPS estimates, industry analysts cut EPS estimates in aggregate for S&P 500 companies during the month of January by 0.7%. This marked the first aggregate decline in expected earnings over the first month of a quarter since Q2 2020. For more details on estimate revisions, refer to my February 7 Insight article. Thus, the market may be reacting more to the negative earnings guidance and downward estimate revisions for the first quarter of 2022 than the earnings surprises being reported for the fourth quarter of 2021.

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